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FRM Part II · FRM Exam Part II · Portfolio Performance Evaluation

An analyst builds a style benchmark for a manager using style analysis: 70% in Index A (return 10%) and 30% in Index B (return 6%). The manager's actual return was 9.5%. What is the manager's selection return relative to the style benchmark?

The style benchmark returned 0.7 times 10% plus 0.3 times 6%, which is 8.8%. The manager returned 9.5%, so the selection return is 0.7%. Using a single index instead of the weighted blend would wrongly overstate the manager's skill.

  1. A0.7%Correct
  2. B1.5%
  3. C-0.7%
  4. D3.5%

Explanation

Style benchmark return = 0.7*10% + 0.3*6% = 7.0% + 1.8% = 8.8%. Selection return = 9.5% - 8.8% = 0.7%. Subtracting only Index B (6%) gives 3.5%, which ignores the weights.

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